Bigger isn’t always better. Once a company has had substantial growth, or become the leader in its industry, its rate of return will tend to slow.
Companies can usually offset this by finding related products to offer or new markets to conquer. But in some mature industries, the best course of action may be to figure out ways to simply increase productivity. That could lead to far better outcomes for investors over time.
For instance, automotive giant Toyota Motors (TM) is up just 10% over the past year. The leading carmaker by volume, performance has been slow going.
However, Toyota just announced a plan to improve its return on equity, targeting a 20% ratio there, compared to a current read just under 13%.
A higher ROE means higher profitability, irrespective of trends like overall revenue. In short, Toyota is looking to get leaner in its process, which could also help improve its stock return.
Action to take: Toyota shares peaked in March around $250, then traded in a range around $175, the latest news is pushing shares out of that range, and the stock may have more room to run higher in 2025.
At current prices, Toyota also pays a 2.9% dividend.
For traders, the April $230 calls, last trading for about $1.85, could have mid-to-high double-digit upside on a further trend higher in the months ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.